Records Show ACS Chairman, CEO Benefited From Questionable Options Practice Known As 'Springloading'

In a SEC filing, ACS said its compensation committee improperly backdated options for several corporate officers during a period from 2000 to 2005.

Paul McDougall, Editor At Large, InformationWeek

January 8, 2007

3 Min Read

Outsourcer Affiliated Computer Services said it would reprice backdated stock options that benefited several key officers, including chairman Darwin Deason and newly installed CEO Lynn Blodgett. However, the company said the move is only being undertaken to eliminate negative tax implications for those officers and in some cases the new effective grant dates appear to remain springloaded -- that is, they closely preceded the release of news that resulted in a significant jump in the company's stock price.

In a Securities and Exchange Commission filing Friday, ACS said its compensation committee improperly backdated options for Deason, Blodgett, and several other corporate officers during a period from 2000 to 2005. For instance, on July 28, 2002, the committee granted Deason 600,000 options carrying an effective price date of July 23 of that year. Blodgett received 75,000 of those options.

ACS now says the options should have been timed to the trading date nearest the committee meeting -- Friday, July 26, 2002. ACS's shares were 5% more expensive on July 26 than on July 23, according to historical trading records.

In the SEC filing, ACS said it is repricing some, but not all, options granted over the period in question to coincide with the date on which they were formally approved, or the nearest trading date. The company said it is taking the step in cases where the affected officers or employees would have suffered "adverse tax consequences" because of the backdating.

But beyond backdating, some options granted to Deason and Blodgett also appear to have been favorably timed through so-called springloading. The July 23 options, for example, were granted one week prior to ACS's issuance of a July 30 press release announcing "record revenues, sales bookings, net income, cash flow and EPS" for the company's fiscal fourth quarter of that year. ACS's stock price increased 12% on the day of the news.

ACS's move of Deason's and Blodgett's option dates for those particular grants from July 23 to July 26 does not eliminate the springloading effect.

To date, the SEC has not set clear guidelines on the legality or ethics of springloading, which critics argue is a form of insider trading. The practice is starting to draw shareholder ire however as corporate stock options come under closer scrutiny in general. A group of investors last month sued Apple Computer, alleging that the computer maker awarded four top executives options to purchase about one million shares exactly one day before Microsoft announced a $150 million investment in the company in 1997.

ACS has said that Deason and Blodgett were not aware of the backdating of their options and they have been relatively unscathed by the scandal to date. Other executives at the outsourcing company, which on Monday won an $87.3 million deal to operate Florida's health insurance program for children for the next five years, were not so fortunate. In November, ACS said CEO Mark King and CFO Warren Edwards had resigned for improperly backdating the price of options grants during a period from 1994 to 2005. Blodgett replaced King as CEO.

During that time, ACS said the executives deliberately chose days on which ACS's stock took a dip as the effective date for the options, making them more valuable when exercised.

Under the Florida deal, worth $87.3 million, ACS will provide IT and business management services to Florida's State Child Health Insurance Program. The program provides health insurance to children who are not eligible for Medicaid.

ACS will process applications for eligibility, collect premiums for eligible members, enroll members in various programs and operate a client assistance call center.

About the Author(s)

Paul McDougall

Editor At Large, InformationWeek

Paul McDougall is a former editor for InformationWeek.

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